Yes, inside the callback this refers to the element not the context of your instance. so try caching this.
var Tset = function () {
    var self = this; //<-- cache this to be used later
    this.a = $('div').text("lorem ipsum ..").appendTo('#a1');
    $(this.a).mouseover(function () {
        self.setBackground('red'); //invoke it with self
    });
    this.setBackground = function (_color) {
        $(this.a).css({
            'background-color': _color
        });
    }
}
var x = new Tset();
There are other techniques available similar to this, that are using Ecmascript5 function.bind, $.proxy etc.
Using bound function:
 var Tset = function () {
     this.a = $('div').text("lorem ipsum ..").appendTo('#a1');
     $(this.a).mouseover((function () {
         this.setBackground('red'); //Now this will be your instanc's context
     }).bind(this)); //bind the context explicitly  
     this.setBackground = function (_color) {
         $(this.a).css({
             'background-color': _color
         });
     }
 }
Except for the bound functions, caller determines the context inside the callback
Fiddle